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How will Facebook make money?

The Facebook IPO is the talk of the town right now, with their share offering already heavily oversubscribed. When their shares hit the markets however their revenue will come under intense scrutiny as investors will look for the company to justify the $100bn+ valuation they’re likely to have when they float on Friday.

Where will the money come from though?

Here I’ll look at some of the challenges facing Facebook.

Getting the advertising right – It was announced this week that GM are scrapping their Facebook ads after claims that they weren’t delivering results for the company. Click through rates are notoriously low on Facebook and whilst research has suggested that they still deliver results subliminally marketers will want things they can actually measure. Sheryl Sandberg said recently that Facebook ads work better in an awareness building capacity rather than in a converting sales capacity, but with Pages still free you do wonder how many will follow GM and just use Pages instead of ads. They have launched sponsored stories recently to get ads into our timelines but it remains to be seen how effective that will be.

Monetising mobile –Last week data revealed that Americans are using the site more often from their mobiles than they are from their computers. That in itself isn’t a problem, except that the mobile version of the site has very few ads on it due to the smaller screen size. Already 80% of UK Twitter users access the site via their phones and it seems highly likely that Facebook will experience a similar trend. Their revenues will plummet unless they can figure out a way to make money from mobile users.

Will they go into search? – If Sandberg is correct and Facebook benefits advertisers by building awareness then search does appear an avenue for them to persue further. A Facebook search engine has been denied by the company, and a recent survey by Greenlight found that most Facebook users would be against the idea.

Whilst their revenue is more diverse than Google’s, with 80% coming from advertising vs 96% at Google, the above represent significant challenges if they are to continue growing their advertising revenue.

In the meantime they’ll no doubt continue investing in things like Facebook Credits and hope that Zynga and other social gaming companies continue to drive engagement and revenue for them in this growth area. Revenue from non-advertising sources has grown from 2% of income in 2009 to 15% of income in 2011 and this growth will be vital if shareholders are going to be kept happy.

Given that the expected valuation is going to be around 20 times revenue, those shareholders will be having some pretty hefty demands of revenue growth in the coming years. Hopefully Facebook will be able to meet them.

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23 thoughts on “How will Facebook make money?”

I can see them charging for Pages eventually as that has to be the main way brands are using the site to reach consumers. The ads are next to useless imo so they have to find a way to monetize the Pages. Probably some kind of freemium thing would work quite well.

Is anyone going to buy the shares? They seem really overhyped at the moment. Great news for the employees and Zuckerberg but I don't know if people will see a return on this unless they sell very quickly.

Yes , sure they will make money but not as as they are expecting . Online market researcher are predict that they will earn around 5$ billion mark which is almost less 1$ billion from what they expected.

Nice find Craig. I would think the external ad network is a given. Sure they'd love to break into China as well, but obviously there are some well established networks already in place there. The search engine, hmm, guess we'll see. Thanks for sharing though.

At TC Disrupt, Zuckerburg mentioned how impressed he was with apps such as Spotify, Runkeeper, Airbnb, etc. – in regards to Open Graph. Toward the end of this topic, he hinted at more features being built for Open Graph – one can infer that the 'Want' Button falls into this domain. I'm curious what your opinion is on the rumored 'Want' Button? Do you see this being an integral piece to FB's external ad network? If not, where else do you see FB deriving true purchase-intent from?

Well a 'want' button is certainly more commercial than a 'like' button, but it obviously represents a pretty big shift away from what people are used to. The powerful thing with Google is that Adwords are only really shown to people that are entering commercial terms, so it's not at all intrusive. That'll be the battle for Facebook, as it's still far from certain that many people go onto Facebook with buying in mind.

1 billion searches a month . Yeah great . After hearing this I analyzed my searches on Facebook and every single one was for a name of a friend already in my friend list . Facebook as a search engine? Thanks but no thanks . Never know when Facebook will start posting my searches in my friends news feed . And there is no option to use FB anonymously . I can use google without them knowing who I am . Impossible to do with FB.

I've always said they should get in to ticketing. Buy Eventbrite or someone, integrate them deeply into Facebook events and go from there. Almost every event nowadays get's a Facebook event to represent it. In fact you can do almost everything you'd want for an event on Facebook already, except for buy/sell tickets. Seems a no brainer to me.

Once they roll out the search engine I am sure they will be able to bring in more revenue from that. If over the next 10 years they can steal a bunch of search traffic from Google their revenue will go up massively. I hope they do as well Google needs some competition!

I agree, 1 billion searches a month is terrific if you are a stockholder, but as a search engine I cannot see pass the mighty Google. Facebook makes money for sure, but do you know anybody who makes money through it?

Looking at the Facebook IPO in retrospect many of the things you pointed out did Indeed happen. The value of the stock certainly did decrease and now that the CEO is answerable to the public there have been some major changes, not all for the better. We shall see how it all shakes out over time.

The alliance between Facebook and Bing in the search arena was a good idea to make more money with ads. But charging the Facebook users to send updates to their fans they payed for before (charging double) is the wrong way to go. People will stop using Facebook pages if they feel ripped off this way.

In the meantime they’ll no doubt continue investing in things like Facebook Credits and hope that Zynga and other social gaming companies continue to drive engagement and revenue for them in this growth area.